Can the transfer pricing rules re-characterise your financing arrangement as debt or equity?
The short answer is yes – following the release of the latest ATO final ruling TD 2019/10 Income tax: can the debt and equity rules in Division 974 of the Income Tax Assessment Act 1997 limit the operation of the transfer pricing rules in Subdivision 815-B of the Income Tax Assessment Act 1997. If you have cross border financing, you should consider the Australian Taxation Office (ATO)’s latest interpretive guidance. TD 2019/10 is in substance unchanged from the draft TD 2018/D6 (except for a change to the examples which I will discuss below).
TD 2019/10 provides the debt and equity rules in Division 974 of the ITAA 97 cannot limit the operation of the transfer pricing rules in Subdivision 815-B. The final ruling is consistent with TD 2008/20 which considered this issue in the context of the old Division 13 of the ITAA 36. TD 2008/20 was withdrawn on 31 October 2018 and does not apply for income years commencing on or after 29 June 2013 but continues to have effect for income years that commenced prior to 29 June 2013.
What this means is that where there is a transfer pricing benefit, Section 815-110(1) has the effect that Division 974 cannot limit the operation of Subdivision 815-B, including the substitution of the arm's length conditions for the actual conditions under Section 815-115.
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